How to Use Leftover 529 Funds

OR families who want to save for their children’s future higher-education expenses, a 529 collegesavings plan offers alluring tax-advantaged benefits. You can withdraw funds tax-free for qualified educational expenses, such as tuition, room and board, books, and computers.

- MARGUERITA CHENG

But for various reasons, you may end up with leftover money in your plan. Your child may, for example, attend a less-expensive school than you expected or choose not to go to college at all. Or maybe the child completed his or her degree ahead of schedule or encountered an unforeseen event, such as a health issue, that shortened the anticipated amount of time spent in school.

Funds in a 529 don’t expire, but you’ll pay income tax and a 10% penalty on investment earnings withdrawn for non-qualified expenses. Taxes and penalties don’t apply to the original contributions.

Excess 529 funds represent both a challenge and an opportunity, and knowing your options is essential. Here are four strategies to avoid non-qualified withdrawals.